Summary |
Risk sharing is a cornerstone of modern economics. It is beneficial to risk-averse consumers and essential for investors and entrepreneurs. The standard economic model of risk exchange predicts that competition in insurance markets will result in all individual risks being insured-that all diversifiable risks in the economy will be covered trough mutual risk-sharing arrangements- but in practice this is not the case. Many diversifiable risks are still borne by individuals; many environmental. Catastrophic, and technological risks are not covered by insurance contracts. In this CE Sifo volume, leading international economists provide new insights on recent development in the economic analysis of the limits of insurability. They find that asymmetric information is a central reason why competition in insurance markets may fail to guarantee that mutually advantageous risk exchanges are realized in today’s economics. In particular, adverse selection and moral hazard help explain why competitive insurance markets fail to provide an efficient level of insurance and hence why public intervention is required to solve the problem. The contributors offer theoretical models of insurance markets involving adverse selection as well as empirical analyses of health insurance and non-health insurance markets in countries including Australia, Switzerland, and the United states.
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